The 10th Man

The End of the Ends of the World

We are about a week into the Greek non-crisis, and nothing especially scary has happened. Stocks opened up lower a couple of times, and there was one wild trading day in EURUSD, but everything is essentially unchanged. Which surprised everyone. Including me, a little.

I used to be a plunger. Loved shorting stuff. I had one muscle, and I flexed it constantly. By my rough calculations, I was up about 18% by the time Lehman went bankrupt in 2008. The more turmoil, the better.

I was born in a bear market. Literally, in 1974, and figuratively—I learned to trade in the dot-com bust. Seven years into my trading career, I had experienced two crashes. I know lots of people who got rich buying GE at six bucks. I almost shorted it there.

So the past six years have been tough on me. I’ve made money, but not a lot. Worse, I’ve been conditioned to expect that whenever I spend a bunch of money on S&P puts, I’m going to get sconed and watch them melt to zero while the market rips higher.

The real kick in the nuts was when the market was melting down on Ebola fears in October and St. Louis Fed President Bullard walks out with a “buy” ticket stapled to his forehead.

Here’s another way to look at this: We had two crashes in seven years, and if you go back in history, the market doesn’t crash all that often.

Like the ‘50s. Stocks went up, quietly, for a decade. Nothing happened.

But this isn’t the ‘50s. There’s an IPO boom, a VC boom, valuations are stretched, and crap like Fitbit is going public. Shake Shack has a bigger valuation (I am told) than the entire coal industry.

We have unicorns and decacorns, and it’s only a matter of time until we have a centicorn. All the kids are going to startups. Talk about risk-taking.

I have seen worse bubbles, but the markets are definitely running hot.

So a developed country is about to default on a couple of hundred billion dollars worth of debt, and the market just shrugs. Worse, it sets a nasty precedent for other, larger economies defaulting on debt. Seems much more contagious than Russia in 1998. And stocks are bulletproof. The only selling going on is in China.

Serious question: Do you give up shorting? Like, throw in the towel?

The thing that gets a lot of people is that they believe the market is engineered by the authorities to go higher. Like Bullard with his rate comments. But it’s gotten so bad, there are wide swaths of people who think the Fed is actually buying stocks. ZeroHedge talks about this all the time.

There is a pretty funny Twitter account called 3:30 Ramp Capital, LLC. Plunge Protection Team rumors have been around since the beginning of time, but six years of stocks going straight up have given rise to all kinds of other theories. (For the record, the Fed fully acknowledges its interventions in the bond market, but it has never admitted to trading stocks.)

And it’s true that “the authorities” want the price of financial assets (stocks, bonds) to go up, and the price of hard assets (commodities) to go down… which is exactly what has happened.

So do governments and central banks ever lose?

In the old days, they lost all the time. In one extreme example, an individual hedge fund took out the entire Bank of England. But central banks are currently on a massive winning streak.

So to answer the question, “Will we ever have a crisis,” you need to answer the question, “Will we ever be allowed to have one?”

I’m not just some crazy guy asking these questions. Market professionals I talk to, hedge fund managers, mutual fund managers, will freely discuss the widespread distortions in the market. They feel like they can’t ply their trade. What I mean is, you can’t buy stuff cheap and sell it dear. Everything is dear, and it keeps going up, and you have to participate or get left behind.

That’s not the way it was in the ‘50s. There was all kinds of value to be found. That was how Warren Buffett made his money.

Today, I realized that, outside of some biotech stuff, I haven’t written about an individual stock in months. There’s just nothing interesting to buy, and you certainly can’t short anything. You’ll get your head blown off.

At one point in my career, I was really good at market timing. Calling tops and bottoms. You just can’t do it anymore. Tops never happen, and bottoms don’t get deep enough to find value. We haven’t had a 10% correction in how long?

Honestly, it’s so hard to invest in this environment, I’ve made nearly all my money in the last two years trading FX. It’s the only thing that makes sense.

This is a lot of me whining. And I’m secretly hoping that this letter means there will be a return to rationality soon.

But probably not. Stupid usually gets stupider.

Jared Dillian

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Comments

l.stouch@roadrunner.com

July 9, 2015, 12:40 p.m.

2 things.

One, Bloomberg note today, NYSE short interest is back to the highest level since 2009. I would expect a nice squeeze. http://www.bloomberg.com/news/articles/2015-07-09/bears-get-rare-victory-on-u-s-stocks-as-shorts-index-falls-10-

Two, we already know BOJ and Swiss CB are buying stocks. Swiss CB largest position is AAPL.

China is not allowing 5% owners to sell any equities. Our CB cannot allow another 1937. The market will remain propped up as long as necessary, and they will do anything they have to do to keep it up.

I would imagine that the major players - Blackrock, T Rowe, AmFunds, Fido have all been told in no uncertain terms that they can sell only if they buy something else. No running to cash.

Basically, the alternative is Armageddon. You know it, I know it.

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